What's next in Detroit bankruptcy case?

Dec. 31, 2013
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Detroit Emergency Manager Kevyn Orr is seen through the LCD screen of a video camera belonging to a Canadian TV station during a press conference on Friday, July 19, 2013 in Detroit. / Eric Seals, Detroit Free Press

by Nathan Bomey, Detroit Free Press

by Nathan Bomey, Detroit Free Press

DETROIT -- With U.S. Bankruptcy Judge Steven Rhodes pressuring the city of Detroit and its creditors to reach a consensual outcome to the largest municipal bankruptcy in U.S. history, the question is: Whether negotiations will turn from contentious to collaborative.

Three points to consider as the case proceeds:

1. Will the city get any supporters on its proposed "plan of adjustment"?

Detroit emergency manager Kevyn Orr is expected to file his first proposed reorganization plan early in January. If he simultaneously reveals that some creditors are supporting the plan, that could signal that a consensual deal is within reach.

But if the first version of the plan of adjustment comes without any supporters - or if it's a particularly low-ball offer - that could be an attempt to force creditors to budge in mediation talks being led by U.S. District Court Chief Judge Gerald Rosen.

Pressure is mounting for creditors to make a deal - particularly pensioners who, Rhodes ruled last month, are subject to cuts, said Fox Rothschild bankruptcy attorney Michael Sweet. Detroit owes about $18 billion in long-term liabilities and debt.

"No matter when in the process you agree to a settlement, you always run the risk that if you don't settle, you could get stuck with a worse deal," said Sweet, who is not involved in Detroit's case but has been tracking it closely.

Even if no one signs off on the plan of adjustment, Orr's team of bankruptcy lawyers could pursue a "cram down," in which they would ask Rhodes to approve the plan of adjustment without a vote of support from creditors.

2. Will appeals go anywhere?

Several major creditors have filed appeals, including the city's largest union, AFSCME Council 25, and the city's two pension funds. But Rhodes blocked the appeals from taking a speedy route to the U.S. 6th Circuit Court of Appeals, at least temporarily.

AFSCME attorney Sharon Levine said the union would continue pursuing its appeal but also participate aggressively in mediation proceedings.

It's possible that a higher court could block the bankruptcy from moving forward, but experts say higher courts are typically loathe to overturn complex bankruptcy rulings that involve a nuanced examination of facts.

3. Can the city exit bankruptcy by September?

That's Orr's goal, and it's still possible.

"It's a very aggressive schedule, but so far the emergency manager and the judge have shown a willingness to move quickly and an ability to move quickly," Sweet said. "I still think it's going to take a lot of work, but every indication I've seen shows the parties involved are willing to work hard to do that."

Still, emerging from bankruptcy about 14 months after the city filed will take quite the feat. The city will need to get a majority of its creditors to approve the plan of adjustment - and the city's labor creditors have vigorously contested Orr's plan to reduce pension payments.

"Judge Rhodes went further than he needed to in the ruling on eligibility by sending a message that folks ought to be looking for a compromise on the pensions," Sweet said. "By listening to what he said, the pension funds have a good indication of where he's likely to go on a plan. So they have two choices: They can either accept that and try to work within that framework to get to a compromise, or they can fight."

To get out of bankruptcy, the city will also need to raise exit financing to pay off a Barclays bank financing deal that will allow the city to pay off a disastrous pension debt interest-rate transaction called "swaps."

Also, the city will need to resolve a bitter dispute over the future of city-owned artwork at the Detroit Institute of Arts - which could be sold to help resolve the bankruptcy - and complete a potentially lucrative deal to spin off the water and sewer department.